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Falling inflation a boost to business confidence

Business groups have welcomed January’s sharp fall in inflation, saying it will boost consumer and business confidence and reduce costs for small firms.

According to the Consumer Price Index (CPI), the rate of inflation dropped to its lowest level for 14 months in January – from 4.2 per cent in December to 3.6 per cent last month – fuelled largely by the dwindling effect of last year’s VAT increase to 20 per cent.

The Bank of England now expects to hit the Government’s 2 per cent inflation target before the end of 2012, with recent price cuts by the UK's big six energy companies, which all put up prices last year, likely to help drive down inflation in the coming months.

The Federation of Small Businesses (FSB) said high inflation had caused problems for many small firms in 2011, largely due to rocketing commodity and fuel prices. “Our research showed that 80 per cent of small businesses saw the cost of running and trading increase in the last three months of 2011,” said Andrew Cave, FSB head of external affairs.

“Small businesses will be encouraged by the improving inflationary outlook, with last year’s VAT increase now factored out of the equation and pressures from commodity and oil prices easing. This should give them confidence and also give a timely boost to consumer spending that has been hit hard by rising prices,” he added.

David Kern, chief economist at the British Chambers of Commerce agreed that small firms would benefit, saying falling inflation would “reduce the squeeze on businesses”.

However, expectations that inflation would fall below target for a prolonged period were “premature”, he warned.

According to Kern, “more forceful measures” to support growth were now needed, including boosting the flow of lending to small firms through credit easing. “The idea of an SME bank should also be seriously considered given the difficulties that small firms are facing in obtaining credit on reasonable terms,” he said.